Meaning
Financial accounting methods distribute the upfront cost of manufacturing equipment, tooling, or engineering over the total quantity of production parts shipped to a customer. This pricing mechanism, known as piece price amortization, avoids large capital expenditure payments during the initial development phase of a battery project. It integrates the development costs into the individual price paid per unit.
Economic Mechanism
Tooling and development expenses are divided by the forecasted production volume and added directly to each component’s unit cost. Once the agreed volume is reached, the unit price drops to the base manufacturing cost.
Risk Factor
Sourcing contracts must define the payment terms if actual production volumes fall below initial forecasts. This definition protects both the buyer and the supplier from unrecovered engineering investments.
Negotiation Strategy
Sourcing teams analyze amortization schedules to ensure that unit prices reduce automatically after tooling costs are fully recovered. This tracking prevents ongoing overpayment during extended production runs.
